FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-23779
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
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(Name of small business issuer in its charter)
Colorado 98-014935
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
C/O TES GmbH, 25 Impler Strasse, Munich, 81371, Germany
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(Address of principal executive offices)
Issuer's telephone number: 011 49 89 720 15 100
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $453,620
As of March 31, 1999, the aggregate market value for the 773,330 shares of the
Common Stock, no par value per share, held by non-affiliates was approximately
$2,078,324.
The number of shares of Common Stock of the registrant outstanding as of
December 31, 1998, were 5,223,330.
Documents incorporated by reference
None
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TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business ................................. 3
Item 2. Description of Property ................................. 16
Item 3. Legal Proceedings ....................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ..... 16
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters ...................................... 17
Item 6. Management's Discussion and Analysis or
Results of Operations .................................... 18
Item 7. Financial Statements ..................................... 20
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ...................... 20
PART III
Item 9. Directors, Executive Officers, Promoter
and Control Persons; Compliance with Section 16(a)
of the Exchange Act ....................................... 21
Item 10. Executive Compensation .................................... 24
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................ 27
Item 12. Certain Relationships and Related Transactions ............ 29
Item 13. Exhibits and Reports on Form 8-K .......................... 30
SIGNATURES ............................................................ 31
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PART I
Item 1 - Description of Business
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Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below under "Factors That May Affect Future
Results," as well as those discussed elsewhere in this Form 10-KSB.
Introduction
Technical Environment Solutions, Inc. (the "Company" and "TES") was
incorporated under the laws of Colorado in June 1994, and is a non-operating
holding company. The Company's operations are conducted entirely in Germany, and
the Company has two wholly owned subsidiaries that have been established under
the laws of Germany. Operations are conducted through these subsidiaries:
namely, Technical Environment Solutions GmbH ("TES GmbH") and TES Oecon AG
("Oecon"). Unless the context otherwise requires, references to the "Company"
include its subsidiaries.
The board of directors of the Company has agreed to a merger of the Company
with Environmental Technologies and Software Solutions, Inc.("ENTECS"). The
Company has filed a registration statement with the Securities and Exchange
Commission in connection with the anticipated merger. Upon consummation of the
merger, ENTECS will become a wholly owned subsidiary of the Company. As a result
of the merger, the Company expects to issue approximately 8,300,237 additional
shares of its common stock to stockholders of ENTECS.
The Merger is expected to result in administrative efficiencies, increased
financial strength, and increased market potential, including global markets,
for the added products that TES shall acquire from ENTECS. The Company expects
that it will be able to better position itself as a result of the Merger to
combine innovative technologies with the offering of certified environmental
services and thereby achieve synergies in the market for its products.
ENTECS is a non-operating holding company. ENTECS operations are currently
conducted entirely in Germany by two wholly owned German subsidiaries, ENTECS
Umwelttechnik GmbH, and ENTECS Software und Umweltmanagement GmbH. ENTECS is
involved in the environmental protection industry, which is expected to grow
rapidly due to increasing investments being made in the area by both private
enterprises and public institutions. The environmental protection industry is
also expected to continually create new jobs because of the dynamic growth in
the area. ENTECS currently holds the exclusive licensing rights to a new
recycling system for the capture an re-use of cement waste and waste water that
is generated by cement mixing plants. The system known as the "BRS-Compact" is
in the process of being patented both as a technology and as a process. ENTECS'
subsidiary, ENTECS Umwelttechnik GmbH, owns an artificial peat production system
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and produces three grades of high-quality all-natural artificial peat products.
The Company believes the products, which ENTECS possesses, will be key benefits
to the Company's business strategies discussed below.
Since 1994, the Company has been engaged in the marketing of recycling
services on a contract basis primarily for electronic scrap and other valuable
waste materials in cooperation with specialist waste disposal companies.
Recently, the Company commenced recycling activities at its own facility in
Landsberg a. Lech, Germany, which is southwest of Munich, and intends to
significantly expand this operation in the future. The Company also intends to
develop a job training school, the Oecon Institute, to provide training and
education for positions in the recycling industry. The Company intends to focus
its job training programs upon providing job education and training for the
long-term unemployed and disadvantaged.
Recycling
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The Company offers a single source solution for the disassembly, removal,
reutilization, reprocessing and marketing of recyclable materials. Its waste
disposal services also include archiving the recycled materials and documenting
of the movement of that material. This has the additional function of serving as
verification for government agencies and environmental protection groups. The
Company's strategies mainly emphasize the technologically feasible reutilization
of scrap electrical and electronic equipment in a manner that not only
demonstrates economic and ecological responsibility but also achieves maximum
conservation of resources through optimum recovery of recyclable materials. The
special equipment and expertise of TES' associates ensures that the materials,
once disposed of, will enter the reprocessing cycle and satisfy all legal
regulations.
Germany has strict laws relating to the disposal of all manufactured
products. Unlike the United States where land is plentiful, Germany is a small
country with a large population. Landfill space is extremely limited. Therefore,
the government requires that electronic scrap as well as an array of other
manufactured product waste be disposed of either by incineration or by
depositing it in abandoned underground coal or salt mines. Hence disposal of
most waste in Germany is more expensive than it is in the United States.
Even stricter laws regarding recycling of electronic products such as
televisions, computers, computer monitors, radios, telephones and virtually
every other type of electronic product are anticipated by the electronics
industry. These laws will require that the old products be broken down into
smaller components, and to the extent possible that these components be re-used
or recycled rather than simply being incinerated. In order to prepare for what
the industry views as inevitable recycling requirements, many larger companies
have already begun to voluntarily comply with proposed recycling standards and
are shipping all used and obsolete electronic products to recycling centers such
as that operated by TES.
The Company also utilizes its manufacturing equipment to convert certain
types of glass from cathode ray tubes ("CRTs"), computer components, and certain
other manufacturing by-products and industrial wastes into manufacturing raw
materials that may be resold.
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The Company employs a two-tier strategy:
decentralized disassembly
centralized processing and re-use.
The Company intends to use a wide variety of collection points as it grows in
the future in order to provide full geographic coverage of Germany's waste
disposal needs.
One important aspect of the Company's service strategy is that all
recycling and disposal paths are fully documented. Each customer who recycles
electronic scrap through TES then receives a printout documenting the disposal
pursuant to the recycling laws. To accomplish this, the Company and its
associates offer a fully comprehensive program to register and sort spent
electronic equipment using the Company's own "RNP" data processing system, a
software program that supports the exchange of data between the Company,
manufacturers and waste reprocessing companies.
The RNP database also contains:
-model and order number of electronic products
-size and weight of electronic products
-analysis of materials in electronic products
Another module in the RNP database is a logistics program likewise
developed by the Company. This program covers:
-collection and disposal
-transportation and warehousing
-disposal and recycling
-documentation of each piece of equipment
-for fixed assets bookkeeping
-for the tax authorities
-for environmental groups
According to figures from the German Federal Office of the Environment,
approximately two million tons of spent electronic equipment is generated each
year in Germany alone. Of these, some 50 to 60 percent comes from the field of
entertainment electronics and another 25 percent from household appliances. The
remainder comes from the area of data processing technologies or from other
technologies primarily used by industry, research facilities and the business
sector. Some 300,000 tons are made up of spent computers and television sets
alone, of which it is estimated that only 25 percent are disposed of in an
ecologically sound manner.
This electronic scrap contains not only valuable raw materials but also a
wide range of toxic substances harmful to the environment. TES collects and
disassembles this spent equipment and then reprocesses and markets the valuable
waste materials salvaged from it. TES also separates and properly disposes of
the toxic substances.
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The Company views the recycling of used television sets and computer
monitors including CRT glass as a growth area and has recently purchased
machinery designed to dismantle the CRTs. In the Company's CRT recycling
operation, its customers will ship used CRTs to the Company. Under the terms of
the agreements with the clients, TES is paid a fee for recycling the used CRTs.
The CRTs include both funnel glass (the back of a television screen, which is
relatively thin and tubular in shape) and panel glass. After the funnel glass
has been cut from the front portion of the tube and cleaned, it can be sold back
to the original manufacturers and other companies to be "upcycled", i.e.
reincorporated into a CRT.
At this time the panel glass can not be recycled and must be incinerated.
TES must pay a small charge to dispose of the panel glass. Management expects,
however, to be able eventually to either sell the panel glass to companies that
recycle glass or, at a minimum, to have these companies haul the panel glass
away at no cost to TES. Even if TES must pay to have the panel glass taken away,
the CRT recycling is a profitable business for the company because of the fees
TES is paid by its customers to recycle the CRTs. The ability to sell the panel
glass will only increase TES' profits from this operation.
The Company believes that the recycling of CRT glass will provide a less
costly and more environmentally responsible means of disposing of waste CRT
glass compared to currently available alternative methods of CRT glass disposal.
Further, management believes that manufacturers will be able to repurchase
recycled CRT glass from the Company at a savings compared to virgin ingredients.
In addition, the Company believes that the electronics industry may be a source
of other waste streams that may be recycled. The Company believes that its CRT
glass recycling and materials reuse capability will position the Company to
process large volume end-of-life television and computer waste since current
regulations in Germany exclude them from landfills.
TES also recycles computer systems. The Company resells many of the used
computer parts that are generated from this recycling activity, including
plastic, gold, copper, aluminum, steel and other raw materials. Management
believes that this is possible because the most cost-effective source for spare
parts is generally recycled parts, and for out-of-production parts, it is
frequently the only source. Conversely, the best use for recycled parts is to
resell them for use in the installed base as either spares or low-cost additions
to existing systems. Similarly, recycled parts are also often both less
expensive and more readily available than repaired parts.
Recycling Process
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The first step in the processing of recycled material involves the
inspection of the material received by the Company to assure that it complies
with requirements set forth in the Company's agreements. Company personnel will
conduct this process on a visual basis. Assuming that the material is in
compliance with the Company's agreements, the material will be sorted for
processing on the Company's recycling line. Nonconforming shipments will be
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rejected and returned to the supplier. This process will be undertaken to
protect the Company from receiving materials that it is not equipped to handle
either on the basis of the economics or safety involved with handling of the
material.
After the material has been sorted, it will then be stored until it is
delivered to the recycling line. Material on the recycling line will be
disassembled, and spare computer parts, integrated circuit boards, and other
parts of the electronic products that can be resold will be sorted and cleaned.
Other material will be sorted for sale (if appropriate), cleaned and (if
appropriate) ground and crushed. As the final result of the process, all of the
residual materials are reused in an environmentally sound way. They are
recovered, sorted, and returned to the cycle of raw materials. To prevent the
processing techniques from emitting toxic by-products, the Company employs
mechanical processes exclusively (i.e., no chemicals are used by TES in the
disassembly process).
The Company disassembles the following kinds of electronic scrap for
recycling:
-cathode ray tubes
-computers and peripherals of any kind
-PCs and monitors
-other office equipment
-household appliances of all sizes
-television sets, radios, VCRs etc.
-telecommunication equipment (e.g., telephones)
-electrical tools
-standby power generation units
-industrial control units
-measurement and control devices
-laboratory and medical equipment
-visual recording and reproduction equipment
-composite plastics and metals
-circuit boards
-magnetic and video tapes
To obtain fully sorted raw materials from worn-out electronic equipment,
the first thing that must be done is to disassemble the scrap by hand. During
this process components with toxic substances such as condensers or lithium
batteries are removed and sent to separate disposal plants.
At this preliminary disassembly stage the scrap is broken down into the
following categories:
-plastics
-ferrous metals
-nonferrous metals
-cathode ray tubes
-cables
-circuit boards
-toxic substances
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If the preliminary disassembly stage fails to yield fully sorted materials,
further processing is required. In the next stages the material is further
broken down through non-chemical and non-thermal processes. The mixture of
materials thus obtained is completely sorted by means of magnets, eddy currents,
wind, sifting or similar techniques.
These processes yield, among other things, the following types of
materials:
-iron
-aluminum
-copper
-glass
-plastics
-ceramics
-composite metal granulates
The fully separated metals and glass are sent to various smelting plants as
secondary raw materials. Similarly, those fully sorted plastics that have not
been treated with flameproofing are sent away for reuse. Plastics which are not
fully separated or which contain bromine flameproofing are disposed in
accordance with legal regulations, as are all other toxic substances. Precious
metal granulates are sent to separation plants for further processing.
All the methods TES employs represent state-of-the-art technologies and
have been streamlined for a smooth interaction of their ecological and economic
aspects. Further, TES' methods are designed to assure compliance with all legal
and government regulations, with the paths of reprocessing and disposal
completely documented.
CRTs are removed from the television sets, and then processed by the CRT
recycling line. The Company employs a specially designed saw to separate the
panel glass from the funnel glass. After the pieces of CRT glass are sorted by
type of glass and by size, the glass is cleaned and coatings on the glass are
removed prior to sale or other disposition of the glass.
Competition
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Management believes that the electronic recycling services industry is
fragmented with widespread competition from a variety of small independent
suppliers and several major suppliers in Germany. Management believes that
competition for recycling and waste disposal customers is based on price and the
ability to offer convenient locations for shipping of waste and recycling
products. Among TES' major competitors in Germany are RWE, VEBA and VIAG, each
operating through wholly owned subsidiaries.
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Government Regulation
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Germany has adopted some of the strictest laws in the world relating to the
recycling and disposal of chemicals, waste, appliances, computers, television
sets, and other electronic products. The business of recycling and waste
disposal is subject to various governmental laws on both a federal and state
basis in Germany. Further, the regulations are becoming increasingly complex and
recycling and disposal more strictly regulated. These laws and regulations
include landfill disposal restrictions, hazardous waste management requirements
and air quality standards, as well as special permit and license conditions for
recycling and disposal of waste and outdated or used products.
The Company's recycling center is subject to various federal, state and
local laws and regulations and licensing requirements relating to the
collection, processing and recycling of chemicals, waste, appliances, computers,
television sets, and other electronic products. Requirements for registrations,
permits and licenses vary depending upon the locale in which a recycling center
is located. The Company's center is registered with the German Government as a
hazardous waste generator and is licensed by appropriate state and local
authorities. The Company also has agreements with approved and licensed
hazardous waste companies for transportation and disposal of the environmental
toxin polychlorinated biphenyl ("PCB's") from its recycling center.
Management believes that further government regulation of the recycling
industry could have a positive effect on the Company's business; however, there
can be no assurance what course future regulation may take. Under some
circumstances, further regulation could materially increase the costs of the
Company's operations and have an adverse effect on the Company's business. In
addition, as is the case with all companies handling hazardous materials, under
some circumstances, the Company may be subject to contingent liability.
Job Training
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In Germany all trades are governed by strict educational standards. This
means that anyone who wants to work as a plumber, carpenter, baker, cook, etc.
must complete a training program for that trade and work for a number of years
under the supervision of a "Meister" in order to gain practical training.
Without this training and experience, one cannot be employed in a trade.
Germany currently has the highest unemployment rates it has had since the
end of World War II. The unification of the former East Germany with West
Germany has created especially high unemployment rates among young people in the
former East German states. The German federal and state governments are
therefore anxious to create job opportunities for these long-term unemployed
youths and is providing subsidies for companies that create jobs.
TES Oecon Institute is developing a job training center. The center is
intended to provide training for long-term unemployed youths and disadvantaged
people. It will offer various new technical job classifications in environmental
protection areas, such as the position, Electronic Recyling Technician, for
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example. TES Oecon Institute will offer courses required by certain governmental
agencies for environmental managers of other companies, as well as seminars and
workshops covering special environmental issues such as environmental law
issues, certification and audits, management systems, software program training,
and ecological input-output analysis.
With its job training program the Oecon Institute will support the creation
of new job possibilities in future-oriented industry areas and will provide the
opportunity for the long-term unemployed and other disadvantaged groups to find
an entrance into the work force. Through the training offered by TES, the newly
trained employees will be prepared for new challenges.
The job title "Electronic Recycling Technician" is timely for the new
market structures because the need for qualified personnel for proper disposal
technologies will significantly increase in the coming years. The practical
training for electronic recycling technician will take place in the Institute's
own workshop and in partner companies throughout Germany.
The new profession, Electronic Recycling Technician, has been defined by
the rules and regulations of the Federal Ministry for Youth and Research and
students who successfully complete the training will receive certification from
the responsible industry chambers of commerce. The job training facility will
receive daily subsidies for each student as required by law.
Management anticipates that the job training center will be very successful
because there is an increasing demand for qualified technicians. In addition,
the government must make even greater efforts to reduce Germany's high
unemployment. There are a number of state subsidies and job creation programs
which offer job training schools a sure and long-term financial basis. Potential
sources for subsidies include, among others, the Social Welfare Offices, Youth
and Social Service Agencies, and Unemployment Agencies. The Company expects it
will be dependent to some extent upon various government subsidies for the new
job training program. Further, along with the job training, the Institute will
offer a number of seminars and workshops covering special environmental issues,
environmental law issues, and the certification and auditing of environmental
operations and locations. A close working relationship with TUEV-Suddeutschland
will allow the Company access to qualified teaching and training personnel.
Employees
The Company has 14 full time employees, including Gerd Behrens, two
management/administrative persons, and 11 line workers employed in its recycling
business. Further, the Company employs one person as a secretary/administrative
assistant on a part-time basis. In addition, the Company has contracted with
three independent contractors who are engaged in the marketing of the Company's
recycling services.
Factors That May Affect Future Results
TES's Business Has Changed. Although TES has been in business since 1994,
until recently its operations consisted mainly of the marketing and sale of
recycling services to larger companies. TES did not have its own recycling
facility but contracted as a "middle-man" to deliver material from larger
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companies to certain recyclers. Although TES recently commenced operation of its
own recycling facility, there can be no assurance that it will be able to
successfully market and conduct its recycling services. Further, although TES
has developed plans to open a job training program for the recycling industry,
there can be no assurance that it will be able to successfully open its job
training facility or that, if opened, TES will be able to operate the facility
on a profitable basis. There can be no assurance that, even after the
expenditure of substantial funds and efforts, TES will ever achieve or maintain
an adequate level of business or profitability. The failure to successfully
market, sell, and conduct recycling operations would have a material adverse
effect on TES's financial condition and results of operations. The failure to
successfully open its job training facility and operate that facility on a
profitable basis could also have a material adverse effect on TES's financial
condition and results of operations.
TES Needs Additional Financing. TES's business is capital intensive. TES is
currently experiencing a liquidity crisis and must raise additional funds.
Further, TES has not generated sufficient cash-flow to fund its operations and
activities. TES has no commitments for any future financing and there can be no
assurance that TES will be able to obtain additional financing in the future
from either debt or equity financings, bank loans, or other sources on
acceptable terms or at all. If available, any additional equity financings may
be dilutive to TES's stockholders and any debt financings may contain
restrictive covenants and additional debt service requirements, which could
adversely affect TES's operating results. If TES is unable to obtain necessary
financing, it will be required to significantly curtail its activities or cease
operations.
TES Is Dependent on Certain Key Employees. TES's success depends to a
significant extent upon a number of key management and technical personnel, the
loss of one or more of whom could have a material adverse effect on TES's
results of operations. Further, TES believes that its success will depend in
large part upon its ability to attract and retain highly skilled technical,
managerial, sales, and marketing personnel. There can be no assurance that TES
will be successful in attracting and retaining the personnel it requires to
develop and market its recycling business or its job training program in a
successful manner. Presently, the Company's wholly owned subsidiary, TES GmbH,
has entered into an employment agreement with Gerd Behrens to ensure the
availaility of his servies to the subsidiary. The employment agreement may be
terminated by either party only upon six months notice.
TES Derives a Significant Portion of its Revenues from One Customer. A
significant portion of TES's revenues have been derived from a limited number of
customers. In fiscal 1998, revenues from TES's largest customer amounted to 10%
of its total revenues, and in fiscal 1997, four customers each accounted for
10%, or 40% total, of TES's total revenues. TES's management expects that TES
will continue to be dependent upon a limited number of customers for significant
portions of its revenues in future periods. There can be no assurance that
revenues from customers that accounted for significant revenues in past periods,
individually or as a group, will continue, or if continued will reach or exceed
historical levels in any future period. TES's operating results may in the
future be subject to substantial period-to-period fluctuations as a consequence
of such customer concentration.
TES's Business is Dependent on Environmental Regulation. German federal,
state, and local environmental legislation and regulations mandate stringent
waste management and operations practices, which require substantial capital
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expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by TES. The level of enforcement activities by federal, state, and local
environmental protection and related agencies, and changes in regulations and
waste generator compliance activities, will also affect demand. To the extent
that the burdens of complying with such laws and regulations may be eased as a
result of, among other things, political factors, or that suppliers of
manufacturing by-products and other industrial wastes find alternative means to
comply with applicable regulatory requirements, TES's ability to procure such b
products and wastes and the demand for its services could be adversely affected,
which could have a material adverse effect on TES's business, financial
condition, and results of operations. Any changes in these regulations which
increase compliance standards may require TES to change or improve its
processes.
TES and its Customers are Subject to Regulation. TES and its customers
operate in a highly regulated environment, and any future facilities may be
required to have various federal, state, and/or local government permits and
authorizations, registrations, and/or exemptions. Any of these permits or
approvals may be subject to denial, revocation, or modification under various
circumstances. Failure to comply with the conditions of such permits, approvals,
registrations, authorizations, or exemptions may adversely affect the operation
of TES's business and may subject TES to federal, state, or locally-imposed
penalties. TES's ability to satisfy the permitting requirements for a particular
facility does not assure that permitting requirements for other facilities will
be satisfied. In addition, if new environmental legislation is enacted or
current regulations are amended or are interpreted or enforced differently, TES
or its customers may be required to obtain additional operating permits,
registrations, certifications, exemptions, or approvals. There can be no
assurance that TES or its customers will meet all of the applicable regulatory
requirements.
TES is Exposed to Potential Environmental Liability. TES's business exposes
it to the risk that harmful substances may be released or escape into the
environment from its facilities, processes, or equipment, resulting in potential
liability for the clean-up or re-mediation of the release and/or potential
personal injury associated with the release. Additionally, TES is potentially
subject to regulatory liability for the generation, transportation, treatment,
storage, or disposal of waste, both hazardous and non-hazardous, if it does not
act in accordance with the requirements of federal or state hazardous waste
regulations or facility specific regulatory determinations, authorizations, or
exemptions.
TES also may be exposed to certain environmental risks resulting from the
actions of the suppliers of the products that it recycles and other suppliers of
industrial waste. Although TES maintains general liability insurance, this
insurance is subject to coverage limits and generally excludes coverage for
losses or liabilities related to environmental damage or pollution. Although TES
conducts and plans to conduct its operations prudently with respect to
environmental regulations and management plans to structure TES's relationships
with customers and contractors in a manner so as to minimize TES's exposure to
environmental liabilities, TES's business, financial condition, and results of
operations could be materially adversely affected by an environmental claim that
is not covered or is only partially covered by insurance or other available
remedy.
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Trading of TES's Securities on the Electronic Bulletin Board and
Classification as Penny Stock May Negatively Impact the Liquidity of TES's
Securities.
o Electronic Bulletin Board. Trading in TES's securities is being conducted
in the over-the-counter market in the NASD's "Electronic Bulletin Board" because
TES does not presently meet the requirements for inclusion in either the NASDAQ
SmallCap Market or the NASDAQ National Market. TES may never meet the
requirements for inclusion in either of those two markets. As a result of
trading on the Bulletin Board, it may be more difficult to obtain quotations of
the market price of TES's securities. Consequently, the liquidity of TES's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts and the news media's coverage of TES, and lower
prices for TES's securities than might otherwise be attained.
o Penny Stock. TES's securities come within the definition of "penny stock"
contained in Rule 3A51-1 under the Securities Exchange Act of 1934.
Classification as a penny stock may adversely affect the ability of
broker-dealers to sell TES's securities and may adversely affect the ability of
TES's shareholders to sell any of their securities in the secondary market
because of the following requirements which are unique to penny stock:
o Rule 15g-9 imposes additional sales practice requirements on
broker-dealers that sell penny stock to persons other than established
customers and "accredited investors" which are generally defined as
individuals with a net worth in excess of $1,000,000 or annual incomes
exceeding $200,000 or $300,000 together with their spouses. For
transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale.
o Prior to any transaction in a penny stock, unless exempt, the rules
require delivery of a disclosure schedule prepared by the Securities
and Exchange Commission relating to the penny stock market. Disclosure
is also required to be made about commissions payable to both the
broker-dealer and the registered representative and current quotations
for the securities.
o Rule 15g-6 requires broker dealers to send customers with penny stock
held in an account with the broker-dealer, monthly statements
disclosing recent price information for penny stocks and information
on the limited market in penny stocks.
TES Must Respond to Technological Change. TES's future success will depend
significantly on its ability to enhance its recycling capabilities in a manner
which keeps pace with technological developments and evolving industry
standards. There can be no assurance that TES will be successful in enhancing
its recycling capabilities or meeting customer requirements adequately. TES's
-13-
<PAGE>
delay or failure to develop or acquire technological improvements or to adapt to
technological change would have a material adverse effect on TES's business,
results of operations, and financial condition.
TES Faces Competition From Other Recyclers and From New Products and
Materials. The market for TES's services and recycled products is competitive
and subject to rapid change. TES's competitors may develop alternative
methodologies that are superior to TES's methodologies or that achieve greater
market acceptance. Further, the market for recycled products and raw material is
dependent to some extent upon prices for new products and material, and
perceptions as to the quality of recycled products or material. To the extent
that the prices of new products or material are competitive with the prices
offered by TES, sales of TES's recycled products may be adversely affected.
Accordingly, there can be no assurance that TES will be able to compete
successfully with its present or potential competition, or that competition will
not have a material adverse effect on TES's results of operations and financial
condition.
There is a Limited Public Market for TES's Common Stock. Until recently,
there was no public market for TES's common stock. At the present time there is
only a limited market for TES's common stock. There can be no assurance that an
active trading market will develop or be sustained in the future for TES's
securities.
TES's Stock Price May Fluctuate Based on Internal and External Factors. The
market price of TES's common stock could be subject to significant fluctuations
in response to variations in actual and anticipated quarterly operating results,
changes in earnings estimates by analysts, announcements of new products or
technological innovations by TES or its competitors, and other events or
factors. In addition, the stocks of many companies have experienced extreme
price and volume fluctuations that have often been unrelated to the companies'
operating performance.
Dividends and Dividend Policy. TES has not paid any cash dividends on its
common stock and does not expect to declare or pay any cash or other dividends
in the foreseeable future. Further, TES had negative working capital of $101,060
and a net deficit of $98,677 at December 31, 1998 and is therefore currently
prohibited from paying dividends to its shareholders under Colorado law.
Current Management Will Continue to Control TES After the Merger. Prior to
the merger between TES Acquisition and ENTECS, the officers and directors of TES
own approximately 64.3% of the outstanding shares of TES's common stock. After
the merger, TES's officers and directors will own approximately 54.3% of the
outstanding shares of TES's common stock. Due to their stock ownership, the
officers and directors will be in a position to elect the board of directors
and, therefore, to control the business and affairs of TES, including certain
significant corporate actions such as acquisitions, the sale or purchase of
assets, and the issuance and sale of TES's securities.
The Trading Price of TES's Stock Could be Negatively Affected by Future
Sales of the Shares to be Issued in the Merger and Upon Exercise of Options
Which Could be Granted in the Future. Management expects that 8,300,237 shares
-14-
<PAGE>
of TES common stock will be issued to the ENTECS stockholders as a result of the
merger. In addition, TES's board of directors has adopted a stock option plan
under which it could issue up to 500,000 shares of common stock. Although, to
date, no options have been granted under the stock option plan, sales of the TES
shares being issued in the merger and of shares issued on exercise of any
options which might be issued in the future under the stock option plan could
have a depressive effect upon the trading price of the common stock. In
addition, the existence of options may adversely affect the terms on which TES
may obtain additional equity capital in the future.
Important Factors Related to Forward-Looking Statements and Associated
Risks. This proxy statement/prospectus contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. TES intends that these
forward-looking statements be subject to the safe harbors created by those
sections.
The forward-looking statements include the plans and objectives of
management for future operations, including plans and objectives relating to the
development and conduct of the recycling business and the job training business,
and the future economic performance of TES. They are based on current
expectations that involve a number of risks and uncertainties, including the
following assumptions:
o that TES will be able to develop its recycling business and develop
and establish its job training programs
o that competitive conditions within the recycling industry will not
change materially or adversely
o that demand for TES's recycling services and recycled materials and
products will remain strong
o that TES will retain key management personnel
o that TES's forecasts will accurately anticipate market demand
o that there will be no material adverse change in TES's operations or
business.
These assumptions involve judgments with respect to, among other things,
future economic, competitive, and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of TES. Although TES believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward- looking information will be realized.
In addition, as disclosed elsewhere under other risk factors, the business and
operation of TES are subject to substantial risks which increase the uncertainty
inherent in such forward-looking statements. In light of the significant
-15-
<PAGE>
uncertainties inherent in the forward-looking information included in this proxy
statement/prospectus, the inclusion of such information should not be regarded
as a representation by TES or any other person that the objectives or plans of
TES will be achieved.
Item 2 - Description of Property
- --------------------------------
The Company currently leases office space for the Company's main corporate
offices at 25 Impler Strasse, 81371, Munich at a monthly rental of approximately
5,552.75 DM. The lease expires on December 31, 2004. Management of the Company
believes that the existing facilities are adequate at this time for the
Company's operations. In addition, the Company leases two buildings for its
recycling operations at Landsberg a. Lech, Germany at a monthly rental of
approximately 18,700 DM. The leases on these buildings expire on December 31,
2001. Under the terms of this lease, the Company also has an option to purchase
the buildings for 2,200,000 DM if the option is exercised prior to December 31,
2000. Thereafter the price shall increase by 77,000 DM per year. The facility in
Landsberg is sufficiently large that the Company expects that it will also be
able to conduct its job training at that same facility.
Item 3 - Legal Proceedings
- --------------------------
The Company is not a party to any legal proceedings, nor does management
believe that any such proceedings are contemplated.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted by the Company to a vote of the Company's
shareholders through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year covered by this report.
-16-
<PAGE>
PART II
Item 5 - Market For Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Until recently, there was no public market for the Company's common stock.
The Company does not presently meet the requirements for inclusion in either the
NASDAQ SmallCap Market or the NASDAQ National Market. Trading in the Company's
securities is being conducted in the over-the-counter market in the NASD's
"Electronic Bulletin Board."
The table set forth below presents the range, on a quarterly basis, of high
and low bid prices per share of Common Stock as reported by the National
Quotation Bureau, Inc. The quotations represent prices between dealers and do
not include retail markup, markdown or commissions and may not necessarily
represent actual transactions. The Company's common stock began trading in the
over-the-counter market during the Company's fourth quarter ended December 31,
1998. The first quotation for the Company's common stock was first reported in
the NASD's Electronic Bulletin Board on October 23, 1998. Therefore, the high
and low bid reported below do not represent a full quarter of activity.
Quarter Ended High Low
------------- ---- ---
December 31, 1998 $3.50 $0.75
- ------------
The Company had approximately 137 shareholders of record as of December 31,
1998, which does not include shareholders whose shares are held in street or
nominee names.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefor. No
dividends have been declared to date by the Company, nor does the Company
anticipate declaring and paying cash dividends in the foreseeable future.
-17-
<PAGE>
Item 6 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations:
Fiscal year ended
December 31
------------------
1996 1997 1998
DM DM DM
- --------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of Operations 60.4 39.6 33.1
Gross Profit 39.6 60.4 66.9
General and administrative 95.8 195.3 230.2
Income (loss) from operations (56.2) (134.9) (163.3)
Interest income .4 4.2 3.2
Losses of Unconsolidated Subsidiary - - (8.0)
Interest expense (14.8) (10.3) (6.7)
------
Net income (70.6) (140.9) (174.8)
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales for the year ended December 31, 1998, were 610,056 DM, an increase of
156,147 DM, or 25.6%, as compared to the year ended December 31, 1997. This
increase in sales resulted principally from increased production volume in the
Companies recylcing business, including increased production volume at its new
Landsberg facility during its first operational year.
Cost of operations for the year ended December 31, 1998 were 202,174 DM, an
increase of 22,484 DM, or 12.5%, as compared to the year ended December 31,
1997. This increase in cost of operations resulted principally from increased
operating cost directly attributable to the increase in Sales. Operating costs
are comprised of principally disposal costs and transportation costs. These
categories of cost increased proportionately with the increased production
volume contributing to the increase in Sales. However, the Company was able to
achieve reduced unit costs in these categories as a result of the increased unit
volume.
General and administrative expenses for the year ended December 31, 1998 were
1,404,368 DM, an increase of 517,672 DM, or 58.4%, as compared to the year ended
December 31, 1997. This increase in general and administrative expenses was due
to increased lease costs resulting from the leasing and opening of the Landsberg
-18-
<PAGE>
facility and to staffing and labor expenses related to the increased production
volume in the Company's recycling business. The Company also incurred increased
general and administrative expenses as a result of increased marketing
activities and additional professional services resulting from the Company's
merger plans with ENTECS.
As a result of the above factors, the operating loss for the year ended
December 31, 1998 was 996,486 DM, an increase in the operating loss of 384,009
DM, or 62.7%, as compared to the year ended December 31, 1997.
Interest income increased minimally for the year ended December 31, 1998 as
compared to the previous year. Interest income was 19,668 DM for the year ended
December 31, 1998 and was 19,190 DM for the year ended December 31, 1997.
Interest expenses for the year ended December 31, 1998 were 40,995 DM, a
decrease of 5,723 DM, or 12.3%, compared to the previous year. This decrease was
a result of the Company paying off a loan of 180,000 DM in early 1998.
The Company incurred a loss of its unconsolidated subsidiary for the year
ended December 31, 1998 of 49,000 DM. No such loss was incurred in the previous
year. The loss of 49,000 DM of its unconsolidated subsidiary is a result of the
Company reporting its share of losses of its investment in a subsidiary, T-Cycle
Computer Service, a German company engaged in the dismantling and disposing of
surplus electronic equipment in Germany. The Company had paid 49,000 DM for its
investment in T-Cycle and accounted for this investment under the equity method
of accounting. T-Cycle has filed for bankruptcy under German law.
As a result of the above factors, the net loss for the year ended December
31, 1998 was 1,066,813, an increase of 426,808 DM, or 66.7%, as compared to the
year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997, were 423,300 DM, an increase of
129,486 DM, or 44.1%, as compared to the year ended December 31, 1996. Cost of
operations for the year ended December 31, 1997, was 179,690 DM, an increase of
2,347 DM, or 1.3%, as compared to the year ended December 31, 1996. Gross Profit
for the year ended December 31, 1997, was 274,219 DM, an increase of 157,748 DM,
or 135.4%, as compared to the year ended December 31, 1996. These increases were
primarily due to an increase in the number of sales persons employed by the
Company from one manager/sales person to four full-time sales persons.
Management believes that the increase in sales and the corresponding increase in
gross profit is directly attributable to the increase in the number of persons
engaged in marketing.
General and administrative expenses for the year ended December 31, 1997,
were 886,696 DM, an increase of 605,082 DM, or 214.9%, as compared to the year
ended December 31, 1996. This increase was principally due to the increased
costs both direct and indirect associated with the increase in the number of
-19-
<PAGE>
sales persons, and increased costs for staffing and equipping the Landsberg
facility and bringing that facility into operation.
As a result of these factors the operating loss for the year ended December
31, 1997, was (612,477) DM, an increase in the loss of 447,334 DM, or 270.9%, as
compared to the year ended December 31, 1996. In addition, these factors
resulted in a loss for the year ended December 31, 1997, of (640,005 DM)
compared to a loss of (207,420 DM) for the year ended December 31, 1996, an
increase in the loss of (432,585 DM).
Liquidity and Capital Resources
The Company is currently experiencing a liquidity crisis and must raise
additional funds. Further, the Company has not generated sufficient cash-flow to
fund its operations and activities. The Company traditionally relied principally
upon internally generated funds and loans from its principal shareholder and his
wife to finance its operations and growth. During the six months ended June 30,
1997, the Company received 2,208,550 DM from an offering of its Common Stock
conducted solely in Germany to German citizens. At March 31, 1998, the Company
had working capital of 179,215 DM and cash of 386,775 DM. At December 31, 1998
the Company had negative working capital of 168,467 DM and cash had decreased to
166,970 DM. Further, the Company has a net deficit of 164,494 DM at December 31,
1998. Currently, the Company is borrowing funds from ENTECS to meet its working
capital needs.
YEAR 2000 COMPLIANCE
The Company does not anticipate any difficulties in year 2000 compliance.
Management has been advised that all software programs that is is using are
already programmed for Year 2000. In addition, the Company's software is also
programmed to accept the New European currency - the EURO.
Item 7 - Financial Statements
- -----------------------------
The response to this item is submitted as a separate section of this report
beginning on page F-1.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
The Company has not had any reported or material disagreement with its
accountants on any matter of accounting principles, practices or financial
statement disclosure.
-20-
<PAGE>
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
The officers and directors of Technical Environment Solutions, Inc. (the
"Company") and key consultants are as follows:
Officers and Directors
- ----------------------
Tenure as Officer
Name Age Position(s) or Director
---- --- ----------- -----------
Gerd Behrens 61 Chairman of the June 21, 1994
Board and President to Present
Frank Behrens 32 Secretary March 3, 1995
and a Director to Present
Jutta Behrens 60 Treasurer March 3, 1995
and a Director to Present
Key Consultants
- ---------------
Karsten Behrens 31 Consultant October 1, 1996
to Present
Yvonne Marquard 29 Consultant February 1, 1997
to Present
Gerd Behrens, Jutta Behrens, Frank Behrens, Karsten Behrens and Yvonne
Marquard may be deemed to be "promoters" and "parents" of the Company within the
meaning of the Rules and Regulations promulgated under the Securities Act.
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are duly elected and
qualified. Gerd Behrens and Jutta Behrens are married to each other, and they
are the parents of Frank Behrens and Karsten Behrens. Frank Behrens and Karsten
Behrens are brothers. There are no other family relationships between any
director or executive officer and any other director or executive officer. Set
forth below is biographical information with respect to the Company's founders
and promoters and each officer and director.
Gerd Behrens, founder and promoter, has been Chairman of the Board and
President of the Company since inception. Mr. Behrens holds a Diploma as a
Businessman (Dipl. Kaufmann), which is roughly equivalent to a Bachelors Degree
-21-
<PAGE>
in Business Administration in the United States. Mr. Behrens has over 35 years
of experience in business with a variety of firms and has served in a number of
positions, including senior management positions, since 1989. From 1989 until
the founding of the Company, Mr. Behrens was the managing director of Data
Consult, a firm located in Munich, Germany, that purchased and sold used
computers. Since the founding of the Company, Mr. Behrens has devoted
substantially all of his time to the business and affairs of the Company.
Frank Behrens has been Secretary and a director of the Company since March
3, 1995. Mr. Behrens is a graduate of Ludwig-Maximillians University in Munich
in Geography and Economics. Mr. Behrens has served as a consultant to various
firms, including the Company, since graduating from the University of Munich in
1995. Mr. Behrens' consulting services have related primarily to urban planning
and development and the development of environmental management systems and
organization structures and certain software tools for these systems. Mr.
Behrens provided the Company with assistance in the writing and drafting of its
business plan and offering materials that were used to raise funds from German
investors and with the development of environmental management systems and
organization structures and certain software tools for these systems.
Jutta Behrens has been Treasurer and a director of the Company since March
3, 1995. Mrs. Behrens is a qualified industrial accountant and has since 1970
owned and operated her own firm which provides accounting services to businesses
and individuals in Germany.
Karsten Behrens has been a consultant to the Company and has acted as its
legal counsel since October 1, 1996. Mr. Behrens is a graduate of
Ludwig-Maximillians University in Munich in law. Mr. Behrens has completed the
necessary post-graduate employment requirements and passed the necessary
examinations to be licensed as a lawyer in Germany. He has provided the Company
with legal services and with other management and consulting services. His
principal consulting activities were focused upon providing the Company with
assistance in the writing and drafting of its business plan and offering
materials that were used to raise funds from German investors and in assisting
the Company with various legal matters.
Yvonne Marquard has been a consultant to the Company since February 1,
1997. Ms. Marquard assisted the Company with the placement of its Common Stock
in Germany. Ms. Marquard founded her own firm--Yvonne Marquard
Unternehmensberatung in 1997 to provide financial consulting services to various
businesses. Prior to founding her own firm Ms. Marquard was employed by AURUM
Vermoegensanlagen GmbH, a German financial services firm.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
generally requires the Company's directors and executive officers and persons
who own more than 10% of a registered class of the Company's equity securities
("10% owners") to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors and executive officers and 10%
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<PAGE>
owners are required by Securities and Exchange Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on review of copies of such reports furnished to the
Company and verbal representations that no other reports were required to be
filed during the fiscal year ended December 31, 1998, all Section 16(a) filing
requirements applicable to its directors, executive officers and 10% owners were
met.
-23-
<PAGE>
Item 10 - Executive Compensation
- --------------------------------
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company in the
three fiscal years ended December 31, 1998, of the Company's executive officers,
and to Karsten Behrens a consultant to the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Other Number of
Name and Fiscal Salary/ Annual Options
Principal Position Year Consulting Fees Compensation Awarded
- ------------------ ---- --------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Gerd Behrens, 1998 15,500 DM -0- -0- (1)
President 1997 57,600 DM -0- -0-
and Director 1996 10,000 DM -0- -0-
Jutta Behrens, 1998 -0- -0- -0- (1)
Treasurer 1997 -0- -0- -0-
and Director 1996 -0- -0- -0-
Frank Behrens, 1998 -0- -0- -0- (1)
Secretary 1997 40,250 DM -0- -0-
and Director 1996 -0- -0- -0-
Karsten Behrens, 1998 12,255 DM -0- -0- (1)
Consultant 1997 98,650 DM -0- -0-
1996 3,150 DM -0- -0-
</TABLE>
- -----------------------------
(1) No advances have been made or are contemplated by the Company to any of its
officers or directors.
Employment and Consulting Agreements
The Company has entered into an employment agreement with Gerd Behrens
under which Mr. Behrens will be paid approximately 6,500 DM per month. Further,
the Company has a consulting agreement with Jutta Behrens' accounting firm under
which Mrs. Behrens' firm is paid 500 DM per month in exchange for providing the
services of Jutta Behrens to the Company. Also, the Company has a consulting
agreement with Frank Behrens' personal consulting firm, under which the firm
will be paid 30 DM per hour for providing the services of Frank Behrens to the
Company. Karsten Behrens serves on the board of directors of TES Oecon AG, and
as such there is a consulting agreement with Karsten Behrens' personal
consulting firm under which his firm is paid an hourly fee of 50 DM per hour for
services as needed. Gerd Behrens devotes his full time and attention to the
business and affairs of the Company. Frank Behrens is expected to devote
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<PAGE>
approximately 30 hours per month on average to the business and affairs of the
Company, with the expectation that as the Company requires more of Mr. Behrens'
time and efforts he will devote more time to the Company with an appropriate
increase in his compensation arrangements. Jutta Behrens is expected to devote
such time as is necessary to maintain the Company's accounting records on a
current basis. It is not anticipated that Mrs. Behrens will devote additional
time to the Company, and as the Company's needs for accounting and bookkeeping
increase, management believes that the Company will hire accounting and
bookkeeping personnel directly to meet those needs. It is also anticipated that
Mrs. Behrens will remain as the Treasurer until such time as the Company's
business requires a full-time person, at which time it is expected that the
Company will replace Mrs. Behrens with a qualified person. Karsten Behrens is
expected to devote approximately 10 hours per month on average to the business
and affairs of the Company, with the expectation that as the Company requires
more of Mr. Behrens' time and efforts he will devote more time to the Company
with an appropriate increase in his compensation arrangements.
The employment and consulting agreements between the Company and Gerd
Behrens, Jutta Behrens, Frank Behrens and Karsten Behrens also contain an
agreement to maintain confidentiality of trade secrets and other materials.
Compensation Pursuant to Plans
Except as described below, the Company has no retirement, pension, profit
sharing, stock option or insurance or medical reimbursement plans or programs
covering its officers and directors, and does not contemplate implementing any
such plans at this time.
The Board of Directors of the Company has adopted a Stock Option Plan (the
"Plan") which provides for the grant of options to purchase an aggregate of not
more than 500,000 shares of the Company's Common Stock. The purpose of the Plan
is to make options available to directors, management, key employees,
consultants, and technical advisers of the Company in order to provide them with
a more direct stake in the future of the Company and to provide them with
additional rewards and incentives for contributing to the success of the
Company.
The Plan will be administered by a committee (the "Committee") appointed by
the Board of Directors which determines the persons to be granted options under
the Plan, the number of shares subject to each option, the term of the option,
the manner in which the option may be exercised and the exercise price of each
option, subject to the requirement that no option may be exercisable more than
10 years after the date of grant. The Committee will have the power to establish
such other terms and conditions for options granted under the Plan as they
determine are necessary and appropriate. No option granted under the Plan shall
be transferable otherwise than by will or the laws of descent and distribution.
The exercise price of stock options granted under the Plan will be established
by the Board of Directors in their sole discretion and may be less than the fair
market value of the underlying shares on the date of grant as determined by the
Committee. The exercise price may be paid in cash or in Common Stock or a
combination of cash and Common Stock.
-25-
<PAGE>
As of the date of this Report, no options have been granted under the Plan.
Except as described below under "Certain Relationships and Related
Transactions," the Company paid no cash or non-cash compensation to any officer
or director during the fiscal years ended December 31, 1995 and 1996.
-26-
<PAGE>
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
ownership of the Company's Common Stock by all officers and directors,
individually, all officers and directors as a group, all beneficial owners of
more than ten percent of the Common Stock as of December 31, 1998, and by one of
the Company's consultants. Except as otherwise indicated, the following
shareholders have sole voting and investment power with respect to the shares.
Percent
Name and address Number of of
of owner shares Class
-------- ------ -----
Gerd Behrens 1,500,000(1) 28.7%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Frank Behrens 600,000(2) 11.5%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Jutta Behrens 1,260,000(1) 24.1%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Karsten Behrens 850,000(2) 16.3%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
Yvonne Marquard 240,000(3) 4.6%
C/O TES GmbH
25 Impler Strasse,
Munich, 81371,
Germany
All officers and directors 3,360,000 64.3%
as a group (3 persons)(4)
-27-
<PAGE>
- -----------------------
(1) Gerd and Jutta Behrens are husband and wife, and own these shares
separately. As husband and wife each of them may be considered the
beneficial owner of the shares held by the other.
(2) Frank Behrens and Karsten Behrens are brothers and are the sons of Gerd and
Jutta Behrens. Gerd and Jutta Behrens disclaim beneficial ownership of the
shares held by their sons.
(3) Yvonne Marquard has served as a consultant to the Company and has been paid
consulting or finder's fees for her efforts in assisting the Company with
its financing efforts. Ms. Marquard is the wife of Michael Marquard, who is
an employee of the Company. Michael Marquard may be deemed to be the
beneficial owner of these shares.
(4) Does not include 850,000 shares held by Karsten Behrens, because he is
neither an officer or director of the Company.
There are no outstanding options, warrants, or rights to purchase
securities from the Company.
-28-
<PAGE>
Item 12 - Certain Relationships and Related Transactions
- --------------------------------------------------------
In connection with the founding of the Company, Gerd Behrens acquired
4,500,000 shares of Common Stock of Technical Environment Solutions, Inc. (the
"Company"). Subsequent to the founding and prior to the time that the Company
raised any funds from outside directors, Mr. Behrens sold his wife, Jutta
Behrens, and his sons, Karsten and Frank Behrens, 2,760,000 of these shares and
sold Yvonne Marquard 240,000 of these shares. Mr. Behrens paid approximately
90,870 DM for his original 4,500,000 shares. The shares discussed in this
paragraph have been adjusted to reflect a stock dividend issued in December,
1998.
In addition, Jutta Behrens has loaned the Company approximately 141,250 DM.
The initial loan was made on March 20, 1996, in the amount of 80,000 DM for a
five-year term and bears interest at 9.25% per year. The second loan was made on
September 10, 1996, in the amount of approximately 50,000 DM for a four year
term and bears interest at 8% per year. The third loan was made on December 31,
1996, in the amount of approximately 11,200 DM for a four year term and bears
interest at 8% per year. Further, Gerd Behrens loaned the Company approximately
100,000 DM in connection with the capitalization of TES Oecon AG, which was
interest free until January 1, 1998. Subsequent to January 1, 1998, the loan
bears interest at a rate of 6% per annum. The loan is due on December 31, 2001,
subject to a right for the Company to extend the loan for an additional 5 years
if necessary for economic reasons.
In connection with the Company's financing efforts in Germany, the Company
entered into an agreement with Yvonne Marquard under which Mrs. Marquard was
paid a consulting or finder's fee based upon the difference between 20% of the
gross proceeds raised and the amount of commission or fees actually paid to
brokers or finders for the sale of the Company's securities. Ms. Marquard was
paid approximately 86,533 DM under the terms of this agreement. Ms. Marquard is
the wife of Michael Marquard, who is an employee of the Company.
The Company also paid Frank Behrens consulting fees equal to 40,250 DM in
connection with the writing and drafting of the Company's business plan and
offering materials that were used to raise funds from German investors and with
the development of environmental management systems and organization structures
and certain software tools for these systems.
The Company paid Karsten Behrens consulting fees equal to approximately
98,650 DM in connection with his performance of legal services for the Company
and the writing and drafting of the Company's business plan and offering
materials that were used to raise funds from German investors.
Except as otherwise disclosed herein, there have been no related party
transactions or any other transactions or relationships required to be disclosed
pursuant to Item 404 of Regulation S-B
29
<PAGE>
Item 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
There are no exhibits filed with this Annual Report
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Commission on December 30,
1998 disclosing that the Company had entered into a Letter of Intent to effect a
merger with Environmental Technologies and Software Solutions, Inc. in which the
Company would be the surviving entity. The merger is expected to consummated no
later than June 30, 1999. No other reports on Form 8-K were filed by the Company
during its fourth quarter ended December 31, 1998.
-30-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Technical Environment Solutions, Inc.
We have audited the consolidated balance sheet of Technical Environment
Solutions, Inc. as of December 31, 1998 and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for each of the
two years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Technical
Environment Solutions, Inc. as of December 31, 1998, and the results of its
operations and cash flows for each of the two years then ended, in conformity
with generally accepted accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Denver, Colorado
March 26, 1999
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Balance Sheet
December 31, 1998
ASSETS
------
DM US $
Current assets:
Cash and cash equivalents 166,970 100,162
Accounts receivable, trade 68,662 41,189
Accounts receivable - other 34,699 20,815
Prepaid expenses 22,004 13,200
---------- ----------
Total current assets 292,335 175,366
Property and equipment, at cost, net of
accumulated depreciation of DM 102,469 162,642 97,566
Investments 10,000 5,999
Note receivable - related party 50,000 29,994
Other assets 300,000 179,964
---------- ----------
814,977 488,888
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable - banks 29,541 17,722
Notes payable - others 80,000 47,990
Accounts payable 102,536 61,508
Accounts payable and accrued
expenses - related parties 115,928 69,543
Accrued expenses 132,797 79,662
---------- ----------
Total current liabilities 460,802 276,426
Loans from shareholders 230,000 137,972
Advances from affiliated company 288,669 173,167
Stockholders' equity:
Common stock, no par value,
20,000,000 shares authorized,
5,244,830 shares issued and outstanding 2,260,155 1,355,822
Accumulated deficit (2,424,649) (1,454,499)
---------- ----------
(164,494) (98,677)
---------- ----------
814,977 488,888
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31,
1997 1998 1998
DM DM US $
---------- ---------- ----------
<S> <C> <C> <C>
Sales 347,213 610,056 365,960
Sales to related party 80,609 -- --
---------- ---------- ----------
427,822 610,056 365,960
Cost of operations 179,690 202,174 121,280
---------- ---------- ----------
Gross profit 248,132 407,882 244,680
Other costs and expenses:
General and administrative 652,519 1,305,774 783,308
General and administrative - related parties 234,177 98,594 59,145
---------- ---------- ----------
(Loss) from operations (638,564) (996,486) (597,772)
Other income and (expense):
Interest income 19,190 19,668 11,798
Losses of unconsolidates Subsidiary -- (49,000) (29,394)
Interest expense - related party (18,100) (24,418) (14,648)
Interest expense (28,618) (16,577) (9,944)
---------- ---------- ----------
(27,528) (70,327) (42,188)
(Loss) before income taxes (666,092) (1,066,813) (639,960)
Provision for income taxes -- -- --
---------- ---------- ----------
Net (loss) (666,092) (1,066,813) (639,960)
========== ========== ==========
Earnings (loss) per share:
Basic and diluted (loss) per share (0.40) (0.61) (0.37)
========== ========== ==========
Weighted average shares outstanding 5,028,813 5,224,830 5,224,830
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
Common Stock Accumulated
Shares Amount Deficit Total
DM DM DM
<S> <C> <C> <C> <C>
Balance, December 31, 1996 4,524,402 121,360 (691,744) (570,384)
Sale of stock for cash 700,428 2,675,310 2,675,310
less expenses of offering -- (536,515) (536,515)
Net loss for the year -- -- (666,092) (666,092)
---------- ---------- ---------- ----------
Balance, December 31, 1997 5,224,830 2,260,155 (1,357,836) 902,319
Net loss for the year -- -- (1,066,813) (1,066,813)
---------- ---------- ---------- ----------
Balance, December 31, 1998 5,224,830 2,260,155 (2,424,649) (164,494)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1998 1998
DM DM US $
-------- ---------- --------
<S> <C> <C> <C>
Net (loss) (666,092) (1,066,813) (639,960)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation 12,521 44,047 26,423
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 56,190 (68,662) (41,189)
(Increase) decrease in prepaid expenses (32,269) 14,350 8,608
(Increase) decrease in other assets (37,935) 40,344 24,202
Increase (decrease) in accounts payable and
accrued expenses including related parties 91,045 142,817 85,673
---------- ---------- ----------
Total adjustments 89,552 172,896 103,717
---------- ---------- ----------
Net cash (used in) operating activities (576,540) (893,917) (536,243)
---------- ---------- ----------
Cash flows from investing activities:
Advance to affiliate (363,250) -- --
Repayment of affiliate advance -- 250,000 149,970
Long-term lease deposit (300,000) -- --
Increase in note receivable (50,000) -- --
Purchase of fixed assets (109,624) (88,323) (52,983)
---------- ----------
Net cash provided by (used in) investing activities (822,874) 161,677 96,987
---------- ---------- ----------
Cash flows from financing activities:
Advances from affiliated company -- 370,200 222,076
Proceeds from sale of common stock 2,138,795 -- --
Decrease in deferred financing fees 19,145 -- --
Repayment of notes payable - bank (22,766) (168,257) (100,934)
Repayment of stockholder advances (6,900) (4,300) (2,579)
Repayment of convertible notes (20,000) (10,000) (5,999)
---------- ---------- ----------
Net cash provided by
financing activities 2,108,274 187,643 112,563
---------- ---------- ----------
Increase (decrease) in cash 708,860 (544,597) (326,693)
Cash and cash equivalents,
beginning of period 2,707 711,567 426,855
---------- ----------
Cash and cash equivalents,
end of period 711,567 166,970 100,162
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Technical Environment Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1998 1998
DM DM US $
Supplemental cash flow information:
Cash paid for interest -- 33,219 19,927
Cash paid for income taxes -- -- --
See accompanying notes to consolidated financial statements.
<PAGE>
Technical Environment Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Summary of significant accounting policies.
Technical Environment Solutions, Inc. and subsidiaries (the "Company) is in the
business of recycling surplus and obsolete electronic equipment. The Company's
operations to date have been carried out solely within Germany by its wholly
owned subsidiaries Technical Environment Solutions GmbH, (TES GmbH)and TES Oecon
AG, formed in 1997 These operations consist of dismantling and disposing of
electronic equipment secured from customers. The Company has used independent
recycling companies to complete the disposal process, however, during 1997, the
Company secured plant facilities necessary to begin certain processing functions
on its own. TES Oecon AG, a wholly owned subsidiary, plans to establish a
technical school for training electronic recycling workers for itself and
others. During February 1998, the Company acquired a 49% ownership interest in
T-Cycle Computer Service and Verwertungs GmbH, a German company engaged in
dismantling and disposing of surplus electronic equipment in Germany.
The Company was incorporated in Colorado on June 21, 1994.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the German Commercial
Code, which represents generally accepted accounting principles in Germany
("German GAAP"). Generally, accepted accounting principles in Germany vary in
certain significant respects from U.S. GAAP. Accordingly, the Company has
recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of and for the year ended December 31, 1998 have been
translated into United States dollars. ("U.S. $") at the rate of DM 1.667 per
U.S. $1.00 the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998. The translations should not be construed as a representation
that the amounts shown could have been, or could be, converted into U.S. dollars
at that or any other rate.
<PAGE>
Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly-liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents and
accounts receivable and payable. The carrying amounts of such financial
instruments approximate fair value because of the short maturity of these
instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for using
the straight line method over estimated useful lives of five to seven years for
equipment and the remaining lease term for leasehold improvements. Depreciation
expense amounted to DM 44,047 and DM 12,521 for the years ended December 31,
1998 and 1997, respectively.
Revenue recognition
Revenue is recorded when services are performed. Sales amounts included in the
foregoing Consolidated Statement of Operations consist of gross contract amounts
paid to the Company by its customers for the removal of recyclable materials.
Advertising
Advertising expenses are charged to expense upon first showing. The Company
incurred advertising expense of DM 9,000 and DM 109,865 during the years ended
December 31, 1998 and 1997 respectively.
Net loss per share
Basic Earnings per Share ("EPS") is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common stock
shares outstanding during the year plus potential dilutive instruments such as
stock options and warrants. The effect of stock options on diluted EPS is
determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price during
the period.
<PAGE>
The basic loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding for the period. Loss
per share is unchanged on a diluted basis since the assumed exercise of common
stock equivalents would have an anti-dilutive effect due to the existence of
operating losses.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenue and expenses during the periods presented. Actual results could
differ from those estimates making it reasonably possible that a change in these
estimates could occur in the near term.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of 1996.
Upon adoption of FAS 123, the Company when required will continue to measure
compensation expense for any stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and will provide pro forma disclosures of the effect on net income
and earnings per share as if the fair value-based method prescribed by FAS 123
had been applied in measuring compensation expense.
Recent Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for all
items that are to be recognized under accounting standards as components of
comprehensive income to be reported in the financial statements. The statement
is effective for all periods beginning after December 15, 1997 and
reclassification financial statements for earlier periods will be required for
comparative purposes. To date, the Company has not engaged in transactions which
would result in any significant difference between its reported net loss and
comprehensive net loss as defined in the statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be capitalized
and when these costs should be expensed as incurred.
Effective January 1, 1998, the Company adopted SOP 98-1. Costs capitalized by
the Company during the year ended December 31, 1998 in accordance with these
guidelines were not significant.
<PAGE>
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position. To date, the Company has operated in one
business segment only.
Effective December 31, 1998, the Company adopted the provisions of SFAS No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits ("SFAS
132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Post-retirement Benefits Other Than Pensions. The overall objective of SFAS 132
is to improve and standardize disclosures about pensions and other
post-retirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations or
financial position. The Company has not initiated benefit plans to date which
would require disclosure under the statement.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company has not yet
determined what the effect of SFAS 133 will be on earnings and the financial
position of the Company, however it believes that it has not to date engaged in
significant transactions encompassed by the statement.
Note 2. Investments
During July 1995, the Company invested DM 10,000 in Okologik AG, a German
company engaged in the production and conservation of energy by alternative
means. The Company's 1,334 shares represent less than 2% of total shares
outstanding. As yet, no market exists for the stock and the Company has
accounted for its investment at cost.
<PAGE>
Note 3. Notes payable and long-term debt
Notes payable - banks at December 31, 1998 consists of a bank line of credit
having a balance at December 31, 1998 of DM 29,541. The line of credit bears
interest at 10.75% per annum and had DM 20,459 additional credit available at
that date. The Company also had a term loan with the bank having a remaining
principal balance due at December 31, 1997 of DM 180,050. The term loan was paid
in full on February 28, 1998.
During 1995, the Company sold DM 210,000 of convertible debentures to thirteen
individual investors in Germany. The debentures bear interest at 10.75% per
annum and are due in March 1999. The debentures were to be convertible into
shares of the Company's common stock, however, none were converted. During 1996,
DM 100,000 plus accrued interest was repaid to certain of the investors. An
additional DM 20,000 plus accrued interest was repaid in 1997. During January
1998, an additional DM 10,000 was repaid.
Note 4. Income taxes.
At December 31, 1997 the Company had approximately DM 2,396,000 of unused net
operating loss deductions in Germany that may be carried forward indefinitely.
A valuation allowance of DM 1,198,000 was provided at December 31, 1998 for net
operating loss carryforwards which more likely than not will not be utilized in
the foreseeable future. The valuation reserve increased by approximately DM
533,000 and DM 320,000 during the years ended December 31, 1998 and 1997,
respectively.
Note 5. Commitments and contingencies
The Company is obligated for non-cancelable operating lease payments with
initial terms exceeding one year relating to office space and warehouse space.
The lease agreements require future minimum lease payments as follows:
Year Ending December 31, Amount
1999 268,260
2000 272,220
2001 287,820
2002 147,420
2003 90,840
--------
1,066,560
In connection with the lease, the Company paid a DM 300,000 refundable deposit
to guarantee performance of the lease and to secure a purchase option for the
building. The lease contract includes a purchase option whereby the Company may
acquire the property for DM 2,200,000 if the option is exercised before December
31, 2000. The deposit is included in other assets in the accompanying balance
sheet. The deposit may be fully offset against the purchase price of the
building, however should the purchase option expire unexercised, the deposit
will be reduced by DM 90,000.
<PAGE>
The Company has accrued DM 22,500 of additional rent during the year ended
December 31, 1998 and will continue making annual accruals through the end of
the option period to provide for the possible impairment of the deposit amount.
Rent expense in 1998 and 1997 was DM 270,420 and DM 49,020, respectively.
The Company has entered into employment contract with its president which
provides for an annual salary of DM 96,000 per year through June 1999.
Note 6. Related party transactions
A shareholder of the Company who is also wife of the Company's president made
loans aggregating DM 130,000 to the Company during the year ended December 31,
1996. The loans bear interest at between 8% and 9.25% per annum and are due DM
80,000 in 2000 and DM 50,000 in 2001 plus accrued interest.
Additionally, during 1993, the shareholder advanced DM 25,000 to the Company of
which DM 6,900 was repaid in each of the years 1995 through 1997 with the
balance of DM 4,300 repaid during 1998.
Additionally, during 1996, the Company's president and major shareholder
advanced DM 100,000 to the Company's German subsidiary. The amount bears
interest at 6% per annum beginning January 1, 1998 and the interest is due at
the end of each calendar year. The loan principle is due in full on December 31,
2001.
The Company's president and major shareholder is president and a shareholder of
ENTECS, Inc. a Colorado corporation formed in May 1997 to exploit patent rights
to a concrete recycling system and related equipment. The Company paid a deposit
of DM 250,000 for the rights to use the concrete system and subsequently
transferred the rights to ENTECS in exchange for a short term note. The advance
was paid in full during 1998. Additionally, ENTECS made advances to the Company
aggregating DM 370,200 during the year ended December 31, 1998. The advances
bear interest at 6% per annum and are due after ten years.
Additionally, during 1997, the Company made working capital advances to ENTECS
of DM 50,000 and paid DM 86,250 of costs associated with the operations of
ENTECS. The working capital advance bears interest at 8% per annum and was
repaid DM 23,000 in 1997 and DM 27,000 plus accrued interest of $1,682 in
January 1998.
The balance of the long term notes due ENTECS net of the amounts due from ENTECS
amounted to DM 288,669 at December 31, 1998 and comprises the balance of
advances from affiliated company included in the accompanying balance sheet.
<PAGE>
During the year ended December 31, 1997, the Company advanced DM 50,000 to a
German entity called Arbeit fur Alle e.V. (AFA). The note bears interest at 8%
per annum and was originally due in installments of DM 10,000 at the end of each
calendar year beginning in 1998. The payments have been extended to begin in
1999. Certain officer/shareholders of the Company have a direct ownership
interest in AFA. Interest accrued as of December 31, 1998 with respect to the
loan amounted to DM 6,600.
During the year ended December 31, 1998 the Company paid an aggregate of DM
98,594 to two officer/shareholders for consulting services provided to the
Company.
Note 7. Stockholders' equity
During the periods covered by these financial statements the Company issued
securities in reliance upon an exemption from registration with the Securities
and Exchange Commission. Although the Company believes that the sales did not
involve a public offering and that it did comply with the exemptions from
registration, it could be liable for rescission of said sales if such exemption
was found not to apply. The Company has not received a request for rescission of
shares nor does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken
On December 31, 1998 the Company effected a stock dividend whereby each holder
of the Company's outstanding common stock received an additional two shares for
each share held. The Company has accounted for the dividend as a three share for
one share forward stock split and consequently, all share and per share data in
the foregoing financial statements and notes thereto have been restated to
reflect the dividend.
During 1997, the Company commenced a private sale of its common stock to a
limited group of investors in Germany. The Company sold 700,428 shares of its
common stock for gross proceeds of DM 2,675,310 and incurred direct expenses of
the offering amounting to DM 536,515.
The Company has established a stock option plan for directors, management, key
employees, consultants and technical advisers whereby an aggregate of 500,000
options to purchase common stock of the Company may be granted. The grant price
of the options will be equal to the market price for the Company's common stock
at the date the options are granted. No options have been granted under the plan
through the date of these financial statements.
Note. 8. Concentrations and information about major customers
During 1998 and 1997, all of the Company's revenue from recycling operations was
derived from sales within Germany. During 1998, the Company had one major
customer, Nutzel/Logosys GmbH which accounted for 10% of its sales. During 1997,
the Company had four major customers, Allianz Versicherungs AG, Bayerische
Landesbank, Hewlett Packard GmbH and Philips GmbH whose purchases from the
Company each accounted for greater than 10% of the Company's sales.
No amounts were due from these customers at December 31, 1998.
<PAGE>
Note 9. Operations of unconsolidated subsidiary
During February 1998, the Company acquired a 49% ownership interest in T-Cycle
Computer Service and Verwertungs GmbH, a German company engaged in dismantling
and disposing of surplus electronic equipment in Germany. The Company paid
DM49,000 for its investment in T-Cycle and has accounted for the investment
using the equity method of accounting. Accordingly, the Company has recognized
its share of the losses of T-Cycle for the period ended December 31, 1998, which
amounted to DM 49,000, as a reduction of its investment in the company. T-Cycle
has filed for protection under German bankruptcy laws. The Company does not
believe that it is contingently liable for any outstanding debts of T-Cycle.
Note 10. Correction of prior year financial statement
The financial statements for the year ended December 31, 1997 have been
corrected to reflect an adjustment to the commission earned by the Company on
the sale of the BRS license technology to ENTECS. The commission has been
reduced by DM 26,087 of German value added tax (VAT) associated with the
transaction. The adjustment increased the net loss for 1997 by DM 26,087 or DM
.0 per share.
Note 11. Proposed merger.
On October 30, 1998 TES and ENTECS entered into a definitive agreement and plan
of merger (the "Agreement") providing for the merger of ENTECS with and into
TES. Under the terms of the Agreement, which was approved by the Board of
Directors of both TES and ENTECS, the holder of ENTECS Common Stock will receive
5.7 shares of TES Common Stock for each of its outstanding shares. The Company
plans to account for the merger as a reorganization of companies under common
control. The accounting for the merger is expected to be similar to that of a
pooling of interests.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Environmental Technologies and Software Solutions, Inc.
We have audited the consolidated balance sheet of Environmental Technologies and
Software Solutions, Inc. as of December 31, 1998 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Environmental
Technologies and Software Solutions, Inc. as of December 31, 1998, and the
results of its operations and cash flows for each of the years in the two year
period then ended, in conformity with generally accepted accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Denver, Colorado
April 2, 1999
<PAGE>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Balance Sheet
December 31, 1998
ASSETS
------
DM US $
Current assets:
Cash and cash equivalents 393,080 235,801
Accounts receivable 2,230 1,338
Inventory 120,000 71,986
Prepaid expenses 56,152 33,684
---------- ----------
Total current assets 571,462 342,809
Property and equipment, at cost, net of
accumulated depreciation of DM 24,758 544,442 326,600
Due from affiliated company 288,669 173,166
License rights 1,123,126 673,741
---------- ----------
2,527,699 1,516,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable 135,552 81,314
Due to related parties 225,000 134,974
Accrued expenses 76,884 46,120
Accrued expenses - related parties 212,769 127,636
---------- ----------
Total current liabilities 650,205 390,044
Stockholders' equity:
Common stock, no par value,
50,000,000 shares authorized,
1,465,182 shares issued and outstanding 3,600,826 2,160,064
Deficit accumulated during development stage (1,723,332) (1,033,793)
---------- ----------
1,877,494 1,126,271
---------- ----------
2,527,699 1,516,315
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statements of Operations
Years Ended December 31, 1997 and 1998
Inception
to
September 30,
1997 1998 1998 1998
DM DM US $ DM
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues -- 69,369 41,613 69,369
Other costs and expenses:
Cost of goods and services -- 14,004 -- 14,004
General and administrative 256,114 1,231,359 738,668 1,487,473
General and administrative - related parties 87,500 217,656 130,567 305,156
---------- ---------- ---------- ---------
(Loss) from operations (343,614) (1,393,650) (827,622) (1,737,264)
Other income and (expense):
Interest income 783 11,066 6,638 11,849
Interest income - related parties 7,515 4,508 7,515
Interest expense - related parties (1,682) (1,009) (1,682)
Interest expense (1,794) (484) (290) (2,278)
---------- ---------- ---------- ---------
(1,011) 16,415 9,847 15,404
(Loss) before income taxes (344,625) (1,377,235) (817,775) (1,721,860)
Provision for income taxes -- (1,472) -- (1,472)
---------- ---------- ---------- ----------
Net (loss) (344,625) (1,378,707) (817,775) (1,723,332)
========== ========== ========== ==========
Earnings (loss) per share:
Basic and diluted (loss) per share (0.33) (0.99) (0.59) (1.33)
========== ========== ========== ==========
Weighted average shares outstanding 1,033,751 1,387,134 1,387,134 1,298,376
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statement of Stockholders' Equity
Year Ended December 31, 1998 and 1997
Common Stock Accumulated
Shares Amount Deficit Total
DM DM DM
<S> <C> <C> <C> <C>
Balance at inception -- -- -- --
Shares issued at inception for service
in May 1997 at $.003 per share 1,090,000 3,685 3,685
Shares issued for services:
July 1997 at DM12.54 per share 800 10,035 10,035
August 1997 at DM12.54 per share 8,200 102,861 102,861
Sale of stock for cash:
June 1997 at DM12.07 per share 1,750 21,131 21,131
July 1997 at DM11.62 per share 43,290 503,164 503,164
August 1997 at DM12.00 per share 24,264 291,059 291,059
September 1997 at DM12.50 per share 25,100 313,719 313,719
October 1997 at DM12.09 per share 14,750 178,375 178,375
Less expenses of offering (422,759) (422,759)
Net loss for the year -- -- (344,625) (344,625)
---------- ---------- ---------- ----------
Balance, December 31, 1997 1,208,154 1,001,269 (344,625) 656,644
Sale of stock for cash:
January 1998 at DM12.31 per share 19,465 239,684 239,684
February 1998 at DM12.22 per share 40,170 490,851 490,851
March 1998 at DM12.18 per share 15,400 187,588 187,588
April 1998 at DM12.43 per share 13,970 173,668 173,668
May 1998 at DM12.23 per share 38,650 472,683 472,683
June 1998 at DM11.50 per share 107,143 1,231,242 1,231,242
July 1998 at DM12.72 per share 22,230 282,630 282,630
Less expenses of offering (478,789) (478,789)
Net loss for the year -- -- (1,378,707) (1,378,707)
---------- ---------- ---------- ----------
Balance, December 31, 1998 1,465,182 3,600,826 (1,723,332) 1,877,494
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Enviornmental Technologies and Software Solutions, Inc.
A Development Stage Company
Consolidated Statement of Cash Flows
Years Ended December 31, 1997 and 1998
Inception
to
September 30,
1997 1998 1998 1998
DM DM US $ DM
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Net (loss) (344,625) (1,378,707) (827,059) (1,723,332)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation and amortization 72,916 183,716 110,208 256,632
Interest added to affiliate loan 1,682 81,531 48,909 83,213
Loss on transfer of machinery -- 16,556 9,932 16,556
Expenses incurred by affiliate 53,763 -- -- 53,763
Expenses added to related party loans 87,500 -- -- 87,500
Common stock issued for services 116,581 -- -- 116,581
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (101,134) 98,904 59,331 (2,230)
(Increase) decrease in prepaid expenses -- (56,152) (33,684) (56,152)
(Increase) decrease in deposits (5,400) 5,400 3,239 --
Increase (decrease) in accounts payable and --
accrued expenses 555,041 (129,836) (77,886) 425,205
---------- ---------- ---------- ----------
Total adjustments 780,949 200,119 120,047 981,068
---------- ---------- ---------- ----------
Net cash (used in) operating activities 436,324 (1,178,588) (707,011) (742,264)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of license rights (568,750) (25,000) (14,997) (593,750)
Advance to affiliated company -- (370,200) (222,076) (370,200)
Purchase of fixed assets (553,042) (152,714) (91,610) (705,756)
---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities (1,121,792) (547,914) (328,683) (1,669,706)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from loan from affiliate 27,000 -- -- 27,000
Repayments to affiliated companies -- (418,695) (251,167) (418,695)
Repayments to related parties -- (287,500) (172,466) (287,500)
Proceeds from sale of common stock 884,688 2,599,557 1,559,422 3,484,245
---------- ---------- ---------- ----------
Net cash provided by
financing activities 911,688 1,893,362 1,135,790 2,805,050
---------- ---------- ---------- ----------
Increase (decrease) in cash 226,220 166,860 100,096 393,080
Cash and cash equivalents,
beginning of period -- 226,220 135,705 --
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period 226,220 393,080 235,801 393,080
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Enviornmental Technologies and Software Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1998
1997 1998 1997
DM DM US $
------- -------- -------
Supplemental cash flow information:
Cash paid for interest -- -- --
Cash paid for income taxes -- -- --
Non-cash investing and financing activities:
License rights acquired for debt 761,250 -- --
See accompanying notes to consolidated financial statements
<PAGE>
Environmental Technologies and Software Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
Note 1. Summary of significant accounting policies.
Environmental Technologies and Software Solutions, Inc. and subsidiariy (the
"Company) is in the business of recycling and disposal of waste materials,
development and construction of new technologies in the environmental area as
well as development, production and sale of software programs for environmental
and recycling solutions and to engage in any other lawful purpose and business.
The Company's operations to date have been carried out solely within Germany by
its wholly owned subsidiaries, ENTECS Umwelttechnik GmbH, (ENTECS GmbH) and
ENTECS Software and Umwelttechnik GmbH, (Software GmbH) formed in March 1998.
The Company was incorporated in Colorado on May 9, 1997. The Company has
recorded limited sales during the periods presented and is considered to be in
its development stage.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The
Company maintains its financial records in accordance with the German Commercial
Code, which represents generally accepted accounting principles in Germany
("German GAAP"). Generally, accepted accounting principles in Germany vary in
certain significant respects from U.S. GAAP. Accordingly, the Company has
recorded certain adjustments in order that these financial statements be in
accordance with U.S. GAAP.
Solely for the convenience of the reader, the accompanying consolidated
financial statements as of and for the year ended December 31, 1998 have been
translated into United States dollars. ("U.S. $") at the rate of DM 1.667 per
U.S. $1.00 the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 1998. The translations should not be construed as a representation
that the amounts shown could have been, or could be, converted into U.S. dollars
at that or any other rate.
Principles of consolidation
The consolidated statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
<PAGE>
Cash and cash equivalents
The Company considers all highly-liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents and
accounts receivable and payable. The carrying amounts of such financial
instruments approximate fair value because of the short maturity of these
instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided for using
the straight line method over estimated useful lives of five to seven years for
equipment and the remaining lease term for leasehold improvements. No
depreciation expense has been recorded for the year ended December 31, 1997 on
the Company's machinery and equipment had not been placed in service.
Depreciation expense for the year ended December 31, 1998 amounted to DM 24,758.
Intangible assets
The Company has purchased certain licenses for the use of technology to be used
in its planned business activities (see Note 2). The licenses are amortized
using the straight line method over the term of the license beginning in 1997.
Amortization for the years ended December 31, 1998 and 1997 amounted to DM
158,958 and DM 72,916, respectively.
The Company makes reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Under SFAS No. 121,
an impairment loss would be recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. No such impairment losses have been identified by the
Company for the 1998 and 1997 fiscal years.
Revenue recognition
Revenue is recorded when goods are shipped or services are performed. Sales
returns and allowances are recorded after returned goods are received and
inspected. The Company expects to begin sales of its products in 1998 and plans
to provide currently for estimated product returns arising therefrom.
Advertising
Advertising expenses are charged to expense upon first showing. The Company
incurred DM 75,815 DM 1,173 of advertising expense during 1998 and 1997,
respectively.
<PAGE>
Net loss per share
Basic Earnings per Share ("EPS") is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common stock
shares outstanding during the year plus potential dilutive instruments such as
stock options and warrants. The effect of stock options on diluted EPS is
determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price during
the period.
The basic loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding for the period. Loss
per share is unchanged on a diluted basis since the assumed exercise of common
stock equivalents would have an anti-dilutive effect due to the existence of
operating losses.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenue and expenses during the periods presented. Actual results could
differ from those estimates making it reasonably possible that a change in these
estimates could occur in the near term.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of operations.
Upon adoption of FAS 123, the Company when required will continue to measure
compensation expense for any stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and will provide pro forma disclosures of the effect on net income
and earnings per share as if the fair value-based method prescribed by FAS 123
had been applied in measuring compensation expense.
<PAGE>
Recent Pronouncements
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines for all
items that are to be recognized under accounting standards as components of
comprehensive income to be reported in the financial statements. The statement
is effective for all periods beginning after December 15, 1997 and
reclassification of financial statements of financial statements for earlier
periods will be required for comparative purposes.
To date, the Company has not engaged in transactions which would result in any
significant difference between its reported net loss and comprehensive net loss
as defined in the statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be capitalized
and when these costs should be expensed as incurred.
Effective January 1, 1998, the Company adopted SOP 98-1. Costs capitalized by
the Company during the year ended December 31, 1998 in accordance with these
guidelines were not significant.
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position. To date, the Company has operated in one
business segment only.
Effective December 31, 1998, the Company adopted the provisions of SFAS No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits ("SFAS
132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Post-retirement Benefits Other Than Pensions. The overall objective of SFAS 132
is to improve and standardize disclosures about pensions and other
post-retirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations or
financial position. The Company has not initiated benefit plans to date which
would require disclosure under the statement.
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS 133 will be on
earnings and the financial position of the Company, however it believes that it
has not to date engaged in significant transactions encompassed by the
statement.
Note 2. Intangible assets
Intangible assets consist of two licenses for the use of recycling technology
and a software license. One of the licenses (Benton Recycling System (BRS)) has
been purchased from an affiliated company which had purchased the license during
March 1997 from an individual who, concurrently with the purchase by the Company
in September 1997, became a director of the Company. The license grants the
Company the right to use patented technology for the recycling of waste concrete
for a fifteen year period. The Company paid an aggregate of DM 625,000 for the
license of which DM 250,000 was due to the affiliated company at December 31,
1997. This amount was paid to the affiliated company during 1998. During 1998,
the Company accrued DM 155,168 for continuing consulting services provided by
the director. This amount is included in accrued expenses - related parties at
December 31, 1998.
Additionally, a royalty of 6% of net sales derived from the licensed technology
is specified in the purchase contract. The BRS patents consists of a registered
process and a patent for the construction of the corresponding machines which
are based on the BRS technology. This patent has been filed for European and
international rights however, it has not yet been registered.
The license excludes Asia and the United States of America, however in these
areas the Company has a first right of refusal for purchase of the technology.
<PAGE>
During the year ended December 31, 1998, due to operational problems experienced
with the machine, the Company suspended payment of consulting fees to the
director and the director has threatened litigation to enforce performance under
the contract. Should the litigation begin, the Company intends to file a
counterclaim for breach of the license agreement. At December 31, 1998, the
Company has accrued the full amount due under the license agreement. The Company
believes that its rights under the license agreement have not been impaired and
that modifications to the equipment design will not be significant and may be
effected by a qualified design engineer other than the director.
The second license (UWAS license, which covers two patents no. EPO 383227 and
EPO 383229 which relate to an artificial peat production system) has been
purchased from an affiliated company which had purchased the license during 1997
from an unaffiliated German corporation. A significant shareholder of the
unaffiliated corporation, concurrently with the purchase by the Company in
September 1997, became a director of the Company. The Company paid an aggregate
of DM650,000 for the license of which DM 250,000 was due to the affiliated
company at December 31, 1998. The process patents for an artificial peat
production system have been registered during May 1993 and May 1992. The
contract expires with the expiration of the patent which, according to German
law normally expires 20 years after registration.
The amortization for the licenses has been calculated on basis of useful lives
of 10 years for the process licenses and 2 years for the software license which
the Company has determined to be appropriate amortization periods for the
licenses using the straight line method. The total amortization for the years
ended December 31, 1998 and 1997 amounted to DM 158,958 and DM72,916,
respectively.
Note 3. Income taxes.
At December 31, 1998 the Company had approximately DM 1,700,000 of unused net
operating loss deductions in Germany that may be carried forward indefinitely.
A valuation allowance of DM 500,000 was provided at December 31, 1998 for net
operating loss carryforwards which more likely than not will not be utilized in
the foreseeable future.
<PAGE>
Note 4. Commitments and contingencies
The Company occupies its administrative offices pursuant to a short term lease
with TES, an affiliated company. Rent expense in 1998 and 1997 was DM 62,488 and
DM 7,200, respectively.
The Company has entered into employment contract with its general manager of
ENTECS GmbH which provides for an annual salary of DM 51,000 per year through
June 1999 and provides for a management bonus of 5% of pre tax profits of the
subsidiary.
Note 5. Related party transactions
The Company's president and major shareholder is president and a shareholder of
TES, Inc., a Colorado corporation formed in June 1994. TES, Inc. paid a deposit
of DM 250,000 and additional payments of DM 86,250 for the rights to use the
concrete recycling system and subsequently transferred the rights to the Company
in exchange for a short term note. During 1998 the note was paid in full.
Additionally, the Company made advances to TES aggregating DM 370,200 during the
year ended December 31, 1998. The advances bear interest at 6% per annum and are
due after ten years.
Additionally, during 1997, the Company received working capital advances from
TES of DM 50,000 and TES paid DM 53,763 of costs associated with the Company's
capital raising activities. The working capital advance bears interest at 8% per
annum and was repaid DM 23,000 in 1997 and DM 27,000 was repaid in January 1998.
The net balance of working capital advances, accrued interest and payment of the
Company's costs amounted less payments by TES of costs associated with the BRS
license in 1997 comprises the balance of amounts due affiliated company included
in the accompanying balance sheet of DM 288,669.
During the year ended December 31, 1997, the Company incurred costs associated
with its organization and financing activities amounting to DM 87,500. The costs
are for services provided by two of the Company's directors and significant
shareholders pursuant to contractual arrangements. This amount in included in
general and administrative costs - related parties and amounts due to related
parties in the foregoing financial statements.
Additionally, in 1998 and 1997, a significant shareholder and director received
DM 146,525 and DM 48,486, respectively in commissions related to the sale of the
Company's securities. This amount has been included in offering expenses in the
accompanying statement of stockholders' equity.
<PAGE>
The Company's president who is a director and significant shareholder receives a
monthly salary of DM 8,000 of which DM 57,600 was unpaid as of December 31,
1998. This amount is included in accrued expenses - related parties in the
accompanying balance sheet.
Note 6. Stockholders' equity
During the periods covered by these financial statements the Company issued
securities in reliance upon an exemption from registration with the Securities
and Exchange Commission. Although the Company believes that the sales did not
involve a public offering and that it did comply with the exemptions from
registration, it could be liable for rescission of said sales if such exemption
was found not to apply. The Company has not received a request for rescission of
shares nor does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken
At inception, the Company issued an aggregate of 1,090,000 shares of its common
stock to five German citizens for services provided in connection with the
formation of the Company valued at DM 3,685.
During July and August 1997, the Company issued an aggregate of 9,000 shares of
its common stock to two German citizens for services provided to the Company.
The shares were issued at DM 12.54 per share which is considered to be their
fair value based on the contemporaneous sale of the Company's shares for cash.
During June 1997, the Company commenced a private sale of its common stock to a
limited group of investors in Germany. The Company sold 109,154 shares of its
common stock for gross proceeds of DM 1,307,448 and incurred direct expenses of
the offering amounting to DM 422,759. The shares were offered at a price of
$7.00 US per share. During 1998 the Company continued the private sale of its
common stock and sold an additional 257,028 shares for gross proceeds of DM
3,078,346. Certain shares of the private offering were purchased by a German
stock brokerage firm at a discounted price net of the brokers agreed upon 17%
sales commission. The discount amounted to DM 91,813 and has been accounted for
as an additional expense of the offering. Direct expenses related to the 1998
stock sales amounted to DM 570,601 including the discount described above.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined statements of
operations of Technical Environment Solutions, Inc. gives effect to the proposed
merger of TES and ENTECS as if such transaction occurred at the beginning of
each period presented. The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1998 is derived from the audited
statements of operations of TES and ENTECS.
The unaudited pro forma condensed combined balance sheet at December 31,
1998 gives effect to the proposed Merger of TES and ENTECS as if such
transaction occurred on December 31, 1998. The unaudited pro forma condensed
combined balance sheet is derived from the historical balance sheet of TES and
ENTECS as of December 31, 1998.
The unaudited pro forma condensed combined financial data do not reflect
the effects of any anticipated changes to be made by TES in its operations from
the historical operations, are presented for informational purposes only and
should not be construed to be indicating (i) the results of operations or the
financial position of TES that actually would have occurred had the proposed
merger been consummated as of the dates indicated or (ii) the results of
operation or the financial position of TES in the future.
The following pro forma condensed combined financial data and notes are
qualified in their entirety by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operation," the consolidated financial statements and notes thereto of TES
and ENTECS and other historical information included elsewhere in this filing.
<PAGE>
<TABLE>
<CAPTION>
Technical Environment Solutions, Inc. / Environmental Technologies and Software Solutions, Inc.
Pro Forma Combined Condensed Balance Sheet
As of December 31, 1998
(Unaudited)
Pro Forma Pro Forma
TES ENTECS Adjustments Combined
DM DM DM DM
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash 166,970 393,080 -- 560,050
Accounts receivable 103,361 2,230 -- 105,591
Inventory 0 120,000 -- 120,000
Prepaid expenses 22,004 56,152 -- 78,156
---------- ---------- ---------- ----------
Total current assets 292,335 571,462 -- 863,797
Property and equipment, net 162,642 544,442 -- 707,084
Investments 10,000 -- -- 10,000
Note receivable - non current 50,000 -- 50,000
Intangible assets -- 1,123,126 1,123,126
Due from affiliated company -- 288,669 (288,669)(3) --
Other assets 300,000 -- 300,000
---------- ---------- ---------- ----------
814,977 2,527,699 (288,669) 3,054,007
========== ========== ========== ==========
Liabilities and stockholders'
equity Current liabilities:
Notes payable - banks 29,541 -- 29,541
Notes payable - others 80,000 -- 80,000
Accounts payable 102,536 135,552 -- 238,088
Accounts payable - related party 35,928 225,000 -- 260,928
Other current liabilities 212,797 289,653 -- 502,450
---------- ---------- ---------- ----------
Total current liabilities 460,802 650,205 -- 1,111,007
Loans from shareholders 230,000 -- 230,000
Loans from affiliated companies 288,669 -- (288,669)(3) --
Common stock 2,260,155 3,600,826 5,860,981
Accumulated deficit (2,424,649) (1,723,332) -- (4,147,981)
---------- ---------- ---------- ----------
Total stockholders' equity (164,494) 1,877,494 -- 1,713,000
---------- ---------- ---------- ----------
814,977 2,527,699 (288,669) 3,054,007
========== ========== ========== ==========
<PAGE>
Technical Environment Solutions, Inc. / Environmental Technologies and Software Solutions, Inc.
Pro Forma Combined Condensed Statement of Operations
Year Ended December 31, 1998
(Unaudited)
Pro Forma
TES ENTECS Adjustments Combined
DM DM DM DM
Net sales 610,056 69,369 -- 679,425
Cost of sales 202,174 14,004 -- 216,178
---------- ---------- ---------- ----------
Gross profit 407,882 55,365 -- 463,247
General and administrative 1,404,368 1,449,015 -- 2,853,383
Losses of unconsolidated subsidiary 49,000 49,000
Interest income (19,668) (18,581) 7,515(3) (30,734)
Interest expense 40,995 2,166 (7,515(3) 35,646
---------- ---------- ---------- ----------
Net income before taxes (1,066,813) (1,377,235) -- (2,444,048)
Taxes on income -- 1,472 -- 1,472
---------- ---------- ---------- ----------
Net income (loss) (1,066,813) (1,378,707) -- (2,445,520)
========== ========== ========== ==========
Basic income per share (0.20) (1.00) -- (0.19)
========== ========== ========== ==========
Weighted average shares 5,224,830 1,378,707 6,479,923(4) 13,083,460
========== ========== ========== ==========
</TABLE>
<PAGE>
(1) On October 30, 1998 TES and ENTECS entered into a definitive agreement and
plan of merger (the "Agreement") providing for the merger of ENTECS with
and into TES. Under the terms of the Agreement, which was approved by the
Board of Directors of both TES and ENTECS, the holder of ENTECS Common
Stock will receive 5.7 shares of TES Common Stock for each of its
outstanding shares. Accordingly, the pro forma condensed combined balance
sheet as of September 30, 1998 gives effect to the issuance of 8,300,237
TES common shares and assumes the Merger with ENTECS will be accounted for
as a reorganization of companies under common control. The accounting for
the merger is expected to be similar to that of a pooling of interests.
(2) The pro forma condensed combined statements of operations gives effect to
the Merger of TES with ENTECS as if the merger occurred on January 1 of the
period indicated.
(3) Inter-company advances, accrued interest thereon and amounts of interest
income and expense have been eliminated.
(4) The pro forma weighted average shares outstanding for basic earnings (loss)
per share gives effect to the issuance of 5.7 shares of TES stock in
exchange for each share of ENTECS stock outstanding for all periods
presented, weighted for the period such shares were actually outstanding.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNICAL ENVIRONMENT SOLUTIONS, INC.
Date: April 15, 1999 By: /s/ Gerd Behrens
------------------------------------
Gerd Behrens, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 15, 1999 /s/ Frank Behrens
-------------- ------------------------------------------
Frank Behrens, Secretary and Director
Date: April 15, 1999 /s/ Jutta Behrens
-------------- -------------------------------------------
Jutta Behrens, Treasurer and Director
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
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